Fresenius Medical Care AG (FMS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing. I am Patrick Wright, your Chorus Call operator.

Welcome and thank you for joining the Fresenius Medical Care earnings call for the third quarter results for 2014. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to Oliver Maier, Head of Investor Relations. Please go ahead, sir.

Thank you very much, Patrick. We would like to welcome all of you to the Fresenius Medical Care earnings call for the third quarter and nine months 2014. Also, a very warm welcome to the ones joining us on the web today. We very much appreciate your interest.

As always, I would like to start out the call by mentioning the cautionary language that is in our Safe Harbor statement of our presentation, and the material that we have distributed today. For further details concerning risks and uncertainties, please refer to our filings, including our SEC filings.

With us today are Rice Powell, our CEO and Chairman of the Management Board, and Rice will give you a general update, business update, and go through some strategic initiatives and some important points there, some of the highlights, and, obviously, also, Mike Brosnan our CFO, who will cover the financials and the outlook in more detail.

With that, I would like to hand it over to you, Rice.

Thank you, Oliver. Welcome, everyone. Mike and I are delighted to discuss our Q3 results with you today.

Before I begin my prepared remarks, let me just say thank you to the FMC senior management team is on the phone and the web today. I appreciate all your hard work this quarter, and the results that you've delivered. Thank you very much.

Looking at slide 4, I would like to start with our headline simply being that it's a continued strong operational performance in the third quarter. Obviously, you've had the results for a number of hours today. I won't belabor going through the numbers with you. You've had a chance to see them. But I would say there are four key takeaways to this third quarter's set of results.

We've confirmed our guidance for the remainder of the year and full year. The Global Efficiency Program is on track. Mike will give you more detail on this later on.

Our sequential growth acceleration has been supported by all the major regions. We told you at the second quarter call that we believed we would continue to see sequential improvement across the regions and among the businesses, and that has turned out to be the case, and we're pleased with that.

And also, we've taken another important step in expanding our care coordination business with the acquisition of National Cardiovascular Partners, and I'm sure we'll talk about that some more later today, perhaps during the Q&A.

Moving to slide 5, a picture is worth a thousand words. We've tried to give you some sense of the sequential performance over the three quarters of the year that we've completed. If we look at revenue growth -- I'll limit my comments to the constant currency view -- you can see from Q1 up through this recently closed third quarter, we've had a nice progression in our constant currency revenue growth, and when you look at it from an organic basis, again, a nice, building performance. And you can see the splits between services and products, particularly products on an external basis.

But we're very proud of these numbers. We think we are making progress in all the areas that we had committed to you that we would.

Looking at the EBIT growth, as well, you can see a progression there, and similarly with net income.

Hopefully, they just simply gives you an easy reference to look and see how we have progressed as we've moved through three quarters of 2014.

Moving to slide 6, you can see that we are consistent in our revenue breakdown for the recently closed quarter. North America at 66% of the revenue, EMEA at 20%, Asia-Pacific and Latin America, respectively.

We're proud of the performance in North America with 11% revenue growth, organic growth at 5%, and then international has had an exceptional third quarter with 16% constant currency revenue growth, and organic growth at 8%, and I'll let you look at the various regions of the international markets as they're listed there for you.

Now, a little more color, beginning on slide 7 with revenue growth in the services business. I'll restrict my commentary to Q3. You've got the nine month numbers, but I do want to try to move through this quickly enough to make sure we have ample time for question-and-answer.

But looking at the third quarter, we were just shy of $3.2 billion in revenue, constant currency growth of 15% on the combined business. Organic growth at 6.3, and same-market at 3.6%. And in looking at the breakdown between North America and international, you see consistent performance in the same-market growth in North America at 3.5%, and then right at 4% internationally. We're proud of that performance, as well, and you can see the organic growth as it's listed there for you.

Moving to our quality outcomes, on slide 8, I would say that you see a fairly consistent performance between the sequential quarters of Q3 and Q2, but I think there's one value here or one indicator that's worth noting. Q3 2014 -- look at the improvement in hospitalization days per patient at 8.9, where we had been at 9.4 in Q2.

Now, this is one quarter. It's a nice result. One quarter does not support a trend. We'll watch this closely as we come through the next several quarters and see if we're able to continue this, but putting it in perspective, should this develop to be the trend that I hope it does, keep in mind that what we're basically indicating here is that our technology platform, our ability to predict outcome, our ability to manage this chronic patient base and keep them out of the hospital is beginning to take root, beyond the fact that generally we're at 9 days where most of the industry is at 10 or 11.

But we're now looking at a very real possibility to continue to pull some of the expense out of the healthcare system here, both from the government standpoint, as well as private pay. So, we're very encouraged, but we're also realistic that one quarter does not a trend make. But we'll keep you posted on that, as we continue to watch it.

Moving to slide 9, and, again, focusing my comments on the external products growth in the third quarter, $916 million in revenue. You can see constant currency growth of 7%, and an outstanding result, really, in both regions, particularly the 9% that you see internationally, but also keeping in mind that in the last quarter North America was at a negative 6, and we've pulled up flat here. So, we've seen progression there, as well.

I would say if you look at the machine business on a global basis, we continue in pockets to see some pressure, probably more exacerbated in the US than anywhere else. But to give you perspective, we were about 260 machines less than what we had hope to be, so, it's not an insurmountable situation for us to see that continue to correct.

As we talked last quarter, I thought -- I told you I thought there could be some correction in third quarter, but I felt it would more likely come in the fourth quarter, and I still believe that to be the case.

Also, I would say our dialyzer growth around the world is very strong. We continue to see great progress there, and then, some of the other disposable products are also growing quite well.

So, I think, all in all, not a bad story for the third quarter of this year in our products business, both internationally, as well North America.

My summary remarks, as you can see on slide 10, I don't think I need to repeat myself on the first couple of summary points that I had. So, let me simply say it's a very strong operational performance across the region in both end products and services.

The integration of our recent acquisitions in care coordination are under the process of integration, or beginning to start. Obviously, we've been very active and we're moving forward on how we integrate those businesses, keeping mind that the integration is somewhat different among those businesses, meaning that with sound we're looking at contracts, and we're looking at physicians coming in to the business. We're not really taking on brick and mortar.

But if you look at National Cardiovascular Partners, which are clinics with brick and mortar, obviously that's a little more traditional as we've looked at our vascular business as it's grown through the years. But those are underway, and we're excited to have them be part of the portfolio.

And lastly, I would simply say, and it's not on the slide, but as you know, on the 31st of October, or Halloween in the US, CMS published the final rule, and we are very comfortable and pleased that, by and large, the rule was very similar to what was proposed last July in terms of both payment and quality for going into 2015. So, we feel that we've got some consistency and some clarity about what's going on there, particularly as we look to next year.

And with that, I'll conclude my remarks, and turn it over to Mike.

Thank you, Rice, and good morning and afternoon to everyone on the call and on the Web.

Turning to chart 12 and looking at the Q3 profit and loss, Rice spoke to the revenues, so I'll move to operating margins. Earnings were up 6% or $33 million year over year. The margin is down from 15.2% to 14.3% or 90 basis points.

Overall, North America's margins were down and contributed to a decline in consolidated margins of about 110 basis points. International margins were up, contributing about a positive 70 and corporate costs increased, reducing margins by 50 basis points, to give you the particulars with regard to that 90 basis point change.

First, just looking at North America, the operating income was flat at $413 million. Margins declined 180 basis points.

Not surprisingly, with the impact of the rebates in 2014, after even considering the favorable market basket adjustment we also received, our reimbursement rate from Medicare is slightly unfavorable in the year, which makes it difficult to offset personnel costs solely on the basis of a change in the associated reimbursement rate.

Our growth in care coordination at lower margins, as we've indicated. FDA remediation costs were a little bit higher. Consulting and legal expenses were also higher in the quarter, and these effects were partly offset by improvements in our commercial book of business, ultimately leading to the margin decline that I just indicated.

In international, the operating income increased $55 million, with a positive margin effect in the international side of the business of 190 basis points to 19.4%. The increase in the margin was due to our business growth in Asia, favorable foreign exchange, and some favorable developments in dialysis reimbursement rates around the world.

In corporate, we did have an increased corporate spend of about $22 million due to increased legal and compliance costs, but I think, importantly in the corporate numbers, we did, in connection with our GEP program, make a provision for the closure of a small manufacturing plant, and then, finally, there was a small unfavorable FX development in corporate over the quarter.

Interest and taxes -- earnings benefited from lower net interest expense. This was largely due to interest income associated with the note receivable we have outstanding in the US showing a slight increase year over year. And interest expense, on a gross basis, is down slightly, due to the mix of our debt and the lower -- due to our debt mix with lower rates, and -- which offset our higher borrowing levels.

Tax effect is 32.9%, just up about 30 basis points, nothing extraordinary there.

Our non-controlling interest did increase by $25 million in the quarter from $33 million last year to $58 million this year. I've commented several times over the course of the year that we do see an increase in the non-controlling interest as a consequence of some of the joint ventures we closed in the back half of 2013. This accounts for about $15 million of the change, and I would say that's a run rate effect related to the changes in our underlying business from a joint venture perspective.

The balance, roughly $9 million year over year, is the result of some one-time, non-recurring effects in the quarter related to just reconciling non-controlling interest for our total joint venture portfolio.

Reported earnings, as Rice indicated, were down slightly. Earnings per share were also down slightly, as he indicated.

Turning to chart 13, and just taking a look at managing our receivables and our DSOs, not a big change here. 1 day improvement, in total, on the sequential quarter from 73 to 72 days. Also 1 day better than year-end levels in that regard.

We continue to see very good performance in the international business, and in North America we see continuing improvement over our high in the first quarter of this year from a DSO point of view. This is a continuation of the Medicare -- lower Medicare DSOs related to the change in ownership forms that we needed to file just after the first of the year.

Turning to chart 13, and taking a look at our cash flows, both in terms of operating cash flows and capital expenditures, you see that the operating cash flows for both years in the quarter were very high. If you, then, look at Q3 '14 over Q3 '13, basically the $712 million compared to the $605 million, that reflects improvement in earnings before depreciation of just under $40 million, and net positive working capital developments of approximately $70 million, quarter over quarter.

The capital improvements essentially relate to changes in prepaids related to vendor rebates, cross- report recoveries, and taxes receivable. A reduction in the inventory levels, year over year, partly offset by the completion of the tax audits, and the payment of the tax audits for $103 million here in Germany, and the relative effects of the change in the DSOs on receivables, year over year.

CapEx is up, year over year, to about 5.4% of revenues, but it's consistent with your guidance, and it relates to the expansions that we're undertaking in a number of facilities worldwide, and acquisition spending, which is not on the slide, for the quarter was about $614 million, and, as I think everyone on the call recognizes, that largely relates to the majority -- the investment we made in Sound Physicians for a majority stake in that business at the beginning of July.

On a nine-month basis, in terms of cash flows, you can see that, again, strong performance in both years. 11% in the current year, which is on track with historically what we produce in terms of cash flow from operations. This represents earnings increases, as well as a use of working capital, because, as we disclosed in prior quarters, we paid the final amounts due under the Grace settlement for $115 million.

Year over year, on a nine-month basis, we did build inventories for safety stock related to our plant expansions, and, again, you have the year-over-year effect of the relative change in DSOs.

CapEx as a percentage of revenue also shows a consistent result, based on the expansion plans we have.

Acquisition spend of about $1 billion for the first nine months represents the close of approximately 28 deals around the world. Sound Physicians we've discussed. We also had some payments, as I disclosed earlier in the year, with regard to performance on the IV iron and the Velphoro registration milestones. We announced the MedSpring acquisition, and we've made some additional acquisitions with regard to both our core and our care coordination businesses.

During the quarter, we did secure some bridge financing for $600 million related to the Sound acquisition. Shortly after the quarter, we financed $900 million in senior unsecured notes, with a 6- and a 10-year tranche, and we subsequently repaid that $600 million bridge loan under our current facility.

Turning to chart 15, and looking at leverage, you can see that our debt's increased to about $9.1 billion, roughly $700 million over year-end levels. This is reflective of our acquisition activity, and there's no other remarkable change with regard to our portfolio or our leverage.

Turning to chart 16, and just talking a little bit about guidance, you can see we're continuing to guide in three broad areas, and we believe our Q3 performance is in line with our full-year guidance.

So, first, the core business you can see we're confirming our numbers. $15.2 billion in revenues, $2.2 billion, approximately, in EBIT, and net income of $1 billion to $1.05 billion.

Secondly, we're indicating, based on the acquisitions we've closed to date, we would expect additional revenue in '14 of a little more than $500 million. In the aggregate, the acquisitions we've closed this year will be modestly accretive to operating earnings. They will, essentially, cover their financing costs, but the contribution to earnings after tax will be negligible.

This is, in part, due to the one-time due to the one-time costs related to the deals we've closed, as well as absorbing the exploratory costs that I've mentioned in prior quarters, as we have evaluated but chose not to pursue other possibilities related to our care coordination strategy.

And third, we're also performing at expectation with regard to our Global Efficiency Program. We've reported savings in our GEP program each quarter, and now the program is yielding on a year-to-date basis about a $40 million net savings for the nine months of the year.

So, since our report in June, this is a net savings increase of about $25 million, and this $25 million does include the cost we've accrued with regard to closing that production facility.

So, our guidance remains unchanged, and we anticipate we'll achieve that guidance for fiscal 2014.

So, that's the conclusion of my remarks. Oliver, I'll turn the call back to you.

Great. Thank you, Mike. Thank you, Rice. Patrick, I think we can now open up for Q&A.

q-and-a

Thank you. (Operator Instructions). And our first question today comes from the line of Michael Jungling of Morgan Stanley. Please go ahead.

Great. Thank you for taking my questions. I have three, please.

Firstly, on Mircera, can you please give us an update on the progress with your pilot trial in the United States?

Secondly, on care coordination, can you comment on the return on capital for Sound and NCP?

And then thirdly, when it comes to care coordination, and you make more acquisitions, can you talk a little bit about or provide some guidance on the impact on minorities going forward? Because it seems that not always do you buy 100%. Some sort of guidance of how that will turn out in the next 12 months, and also in the years to come?

Thank you.

Thank you, Michael. It's Rice. Let me take number one, and then we'll divvy up two and three. The Mircera update is pretty simple. We will be starting the pilot this quarter, so patients will begin being dosed this quarter, and we'll be underway, and we'll see where we go. I know it's been a long time coming, but it will get started yet in the fourth quarter.

I think on your number on the return on capital for care coordination, we're going to take a pass on that one. I'm not sure we're quite ready to get into that at this point in time, but I know you, you'll ask it again at some point, so maybe we can talk about it in February.

And on care coordination, relative to the impact on minorities, Mike, would you be willing to speak to that?

Sure. Sure, and I'll just remind folks that I agree with Rice's comment on kind of the short-term view of care coordination, but we did give some guidance on ROIC in our Capital Markets Day in our kind of mid-term planning period that we'd anticipate about 100 basis point increase in the total business over that period of time.

On the minorities, I'd indicated last quarter that we'd be in about the 9% to 10% range if you measured the non-controlling interest against profit before tax. If you take out the one-timers that I just mentioned for Q3, you get to the 10%. So, I think, with the current complex of businesses in our third quarter results, I'd expect that to hold, and then, as we look into 2015 and we round out our overall acquisition program I'll probably comment on this again in the year-end results in terms of looking forward to 2015.

A question -- just a follow-up question on the -- on transaction costs for Sound and NCP, would you say that these transaction costs are material for this quarter and also for Q4?

The -- I would say they're certainly not material to our earnings after tax. We do -- we historically have acquisition costs in our operating results, and you're correct, with the program we've now put in place this year, those are larger in '14 than they were in the corresponding period 2013.

So, they're, net after tax, several million dollars, but I wouldn't classify them as material.

Great. Thank you.

And our next question comes from the line of Gary Lieberman of Wells Fargo. Please go ahead.

Hi, it's -- good morning. This is Ryan Halsted, on for Gary.

I guess just a broad question on the revenue per treatment in the US looked pretty strong for the quarter. I guess just any general observations on the quarter on what drove that growth?

Thanks, Ryan. I'll let Mike speak to that, and I may have a couple of comments, as well, but we are pleased with what we saw. But, Mike, you want to give a little more color on that, please?

Sure. No, we are pleased. It's actually -- Q3 is, I think, performing consistent with what I indicated in the second quarter call, where we indicated that we thought we would see on a sequential quarter basis some improvement in that metric. And when you look at Q2 over Q3 you are seeing revenue per treatment up about $6 and cost per treatment up about $4. So, you're seeing an improvement in the net margin of about $2, sequential quarter, up $1 year over year.

So, we're pleased with that result.

Yes, and, Ryan, that's US numbers. I think if we look at North America in total, it's up $6, Mike, and maybe $5 on the cost, but I think the lion's share of this is US, so, we'll stick with the $6 and the $4.

Okay. And then just a -- or another question. On the products business, surprised to see that it looked like FX did not have as much of an impact as maybe we were expecting. So, I'd just be curious on how you managed around currency?

Yes, I think -- and our business has a certain amount of stability as it relates to FX, so, I'll point the folks on the call to go back to some of the guidance that I provided in the -- well, a couple of years ago, to be precise, relative to FX.

Generally speaking, because we're balanced globally in terms of where we produce product and where the businesses are located, the benchmark I've given in the past is for about a 10% change in the euro/dollar relationship you'd have about, let's say, on average, about a 1.5% change in earnings after tax in terms of those two core currencies.

And then, as our business has developed, particularly as it's grown in the Asian markets, the Asian currencies tend to follow the US dollar, while the European currencies tend to follow the euro, so that against that 1.5% you can have some additional volatility.

So, for a 10% change in euro/dollar the knock-on effects could you put something in, let's say, 0% to 0.5% or, up to 4 points, plus or minus, on the earnings after tax.

So, order of magnitude, worst case scenario, you're looking at a 10% change in the euro/dollar driving about a 4% after tax effect.

Okay, great. Thank you.

Okay.

And our next question comes from the line of Lisa Clive of Sanford Bernstein. Please go ahead.

Hi, good afternoon. Three questions for you.

Number one, your reduction in hospitalization days, you've mentioned how technology is important here. Could you, perhaps, elaborate? I know CRIT-LINE was an interesting acquisition a few years ago. Is that product fully rolled out across your clinics today? And have you specifically seen a reduction in fluid retention related to hospitalizations?

Second question, interesting to see the significant increase in your international services revenue. Have you done any notable acquisitions that's driven this? Are any of these countries new countries? I suppose I'm particularly interested in the patient increase we saw in Asia-Pacific in Q2, which seems to now be coming through the numbers.

And then third question, international margin of 19.4% was pretty impressive. Are these levels sustainable? I know it's, in part, due to good product growth, which is higher margin, but you also did see a big jump in the services business internationally, so, I'm just trying to think about what's a sustainable margin for that business as a whole, going forward?

Hey, Lisa, it's Rice. Let me take one and two, and then I'll let Mike take number three.

What I would say is, I think there's a play for all of our technology as to how we are approaching patient care that helps us, if, in fact, this hospital day drop turns out to be real.

But even at 9.4 days, we're well below the average in the US, and I would say two things. We've got CRIT-LINE being deployed. It is not everywhere. We have too many clinics. It's too big at the point. In the places where we've focused with CRIT-LINE, we've seen it deliver what we hoped it would in terms of fluid management, and its ability to help with outcome, clinical outcome. But we're too big to really push that out as quickly as some people might think, and we do want to be cautious about it and make sure that we're doing it in the right way.

But I do think technology has a hand in this, but, obviously, a big piece of this comes from the fact we've got some pretty incredible docs and care givers that are helping us get there.

I think you asked a very elegant question, your number two. But let's go back to, as we said before, yes, we've done some acquisition in Asia-Pacific. We don't really want to get into a lot of detail on that at this point, because we are in the thick of a fairly significant competitive race there. But I will leave it at that.

But, yes, Asia-Pacific is the region that we've had some activity, and I know we -- we're not trying to be cute. We're trying to be smart about how we manage this, but it's a little bit of the same answer we gave you last quarter, but we're going to, as it were, open the kimono. At some point, we'll be comfortable to go through that with you. We're just not quite there at this point.

And let me turn it over to Mike on the sustainability of the international margin. Mike, it's 19.4%.

Sure. Sure, the only thing I'd add to Rice's comment relative to sort of international services, there are actually no new countries in the complex of business.

The -- so, coming to international margins, when you look at the quarter, I'd say the quarter, obviously, is extraordinarily high. I mentioned that one of the things that influenced that was favorable FX. So, I think when you look year over year, and you were looking only at the quarter, FX was very positive, 110 basis points in terms of that margin effect.

So, if you were to, then, look at the nine-month data, rather than the quarter, I think that's a little bit more representative. You've got some growth associated with Asia, as Rice just indicated. You've got a favorable FX effect of about 50 basis points, and then you have favorability in terms of reimbursement developments in a number of countries.

So, we've always pleased with the relative performance of the international margin. It does go through some peaks and valleys, particularly when you consider some of the Latin American countries, and the timing associated with the reimbursement increases. So, I think the margins in international we'd expect to continue to be strong, but I don't think I'd be telling you that 19% or 19.5% is a sustainable level of margin. It's too heavily influenced by FX and timing of reimbursement increases.

Great. Thanks. Very helpful.

And our next question comes from the line of Tom Jones of Berenberg. Please go ahead.

Oh, good afternoon. I had three questions, actually.

The first one is just a follow-up on Lisa. I'm going to just try asking you a little bit about what's going on in Asia-Pac. The revenue per treatment in international markets jumped up quite considerably in the quarter. I think it was 13% it was up year on year on a constant currency basis.

I just wondered how much of that was mix, driven by whatever it is you don't want to talk about in Asia-Pac, and how much of it was some underlying organic, like-for-like increase in international pricing?

The second question, I just wondered if you could give us some indication if you lumped all the GP costs, the legal costs, stuff around GranuFlo and all the compliance costs, all the M&A costs, everything that's kind of one-off and that other companies in our space arguably might strip out of an adjusted figure, what would that sum have been, ballpark, for Q3, just to, perhaps, give us an idea of what the sort of recurring earnings looked like for FMC?

And then the third one I'll ask in a sec.

Okay. Hey, Tom, I'm going to let Mike take a shot at one and two, and then we'll see what you've got for your third question there.

Yes. I guess your first question was revenue per treatment in international.

Sure.

And we don't really break out a mix effect there. As you know, from prior quarters, we publish the constant currency rate, because there does seem to be an interest, generally, in terms of tracking that. But the mix effect in any given quarter in terms of one country that may have a different complex of costs that they're reimbursing for. As you know, some countries include the drugs that are delivered in the reimbursement rate. Other countries do not. So, all those things have a significant effect on mix, and we typically don't break that out.

And also, over the years, we have not, historically, broken out any of the acquisitions we've done, some of them quite significant if you go back to Euromedic and some of the other deals that we've done in the European space.

So, I think the constant currency analysis for rate per treatment in international is a good, positive indication that, generally speaking, reimbursement is keeping pace with what we see as our costs in the international market, but I couldn't single out any one effect of mix, because you're looking, easily, at over 40 countries that contribute to that metric.

You said a mouthful when you said just about everything you could think of in terms of potentially one-time costs. I'm not sure that I could give that answer the appropriate response that it might deserve, because I commented earlier to Michael's question with regard to acquisition costs. We updated our guidance in that area, and so, we'll have to see what develops over the course of the last quarter of the year in that regard.

The -- I've been consistent for the last couple of years with regard to the legal, the compliance, and the other, and the FDA remediation costs. So, while I absolutely appreciate and agree with your sentiment that these are one-time costs, they've been with us for a little while, and I think they'll probably with us for a little while longer. So, I wouldn't view them, right now, as a one-off, coming into the fourth quarter.

Yes, I mean, Tom, when you think about it, we've been pretty -- pretty clear on GranuFlo. We don't think we really see that getting to trial 'til the back of the year. So, to Mike's point, and the FDA remediation, we're not expecting them back in 'til probably middle of next year. So, this is going to be with us a while. It's a little hard for us to kind of view it as one-off, when we know these activities aren't coming for another six, eight months, something like that.

Fair enough. And then the final question is just something that's confused me slightly. If you look at the difference between your total reported product revenues, and then what you report internationally and in the US, there's always a small difference, and historically, I kind of ignored it, because it was a single digit or low-double-digit number.

But for the last three quarters, it's been trending upwards quite significantly. It's gone from $9 million in Q1 to $17 million in Q2 and, I think, $34 million in Q3, and at that run rate, it makes whatever it is that's in there a kind of a $100 million annual business. Any light you can shed on that little bit of your business?

Sure. Mike?

Yes. Yes, it's -- it has gone up. I would say it's a little bit of a flip. We've been making some product for one of the sister companies in the Fresenius complex. I don't view that as something long term that you should focus on, in terms of baking it into your model.

Okay.

Okay.

So, something in the high-single, low-double digits would be a more normal run rate for that, whatever it is?

It's a big change, particularly in the quarter, year over year, but I wouldn't say it's an important change.

Yes, and just think of it as we're doing some OEM production for one of the sister companies, because we can help them in a certain period of time, Tom. We do that, off and on, from time to time.

Okay, fair enough.

Thank you.

And our next question comes from the line of Margin Brunninger of Jefferies. Please go ahead.

Hi. Thanks for taking the question. I actually have only one question.

In terms of care coordination and your acquisition strategy, you have given a lot of details on the next few years, how you're going to build your revenues in care coordination, forecasted growth and acquisitions. Could you give us some indication how you think about return of investment as compared to its cost of capital? And looking at your margins, your margins have been deteriorating for some time now, maybe you give us, also, some indication when you think this is going to be stabilized?

Thanks.

Sure, Martin. Mike, go ahead, please?

Yes. No, it's -- I mean, mirroring what I said earlier, we're not really looking near term to prognosticate, but we did indicate, when you look at the total business in the planning period, down to 2020, we're anticipating about a 100 basis point improvement in return on invested capital. So, obviously, care coordination plays a role in that, plays a part in that overall improvement for the Company.

Okay, thank you.

Thank you, Martin.

And the next question comes from the line of Ian Douglas-Pennant of UBS. Please go ahead.

Thanks very much. Most of my questions have actually been answered. I've just got one question in two parts left.

On your care coordination acquisitions, I mean, you've spent quite a lot of money this year, and you've given some guidance on that. How much do you feel, you can go forward, given you're going towards the top end of your gearing range, now without spending any money? And, actually, how much can you achieve just by partnering with businesses like this, without taking an ownership stake?

And maybe if you could just talk through why this hasn't been a route, typically, that you've gone down before, why you feel you need to own those businesses, as well?

And do you feel under pressure? I mean, as I said, you've done quite a lot of deals this year. Do you feel under pressure to do those deals quickly, or is it just there's a lot of opportunity at the moment?

Thanks very much.

Hey, Ian, let me see if I can do this, and Mike will jump in here, as well.

First, let me just say, generally we're not a company, I'm certainly not a CEO, that feels that I need to have deal fever. I think that gets you in trouble, but I also would say there's a certain pace and a certain opportunity to some of these assets that we are acquiring, and so, when the time is right and if we're comfortable, then we're not going to be afraid to pursue them.

It's a great question on buying or partnering, and I would say this, we just believe from our experience in dialysis and the fact that this care coordination is very adjacent, it's very germane to what we're doing with these dialysis patients, that when we're in control and we have the ability to impact all of the variables of care, we have a much better way to predict outcomes and to think about down the road when there comes that point in time that we might want to look at fully capitated risk or something like that.

Sometimes that gets to be very difficult in a partnering scenario. It's hard to really find a way for that to work perfectly, or I would say, perhaps, we've not been able to find that. So, we're not opposed to partnering, and I can imagine that somewhere down the road that may make the most sense at some point, but in this particular case, I think these were care coordination assets that we were comfortable with. They happened to be available at the time they were, and so we thought it was prudent to move.

Mike, any further input on that?

No -- yes. Thanks, Rice. Yes, I would agree we're going to be doing both as it relates to care coordination, because that's the way the market's presenting itself to us.

In terms of your question on timing, just to put it in context, we indicated in our strategy that over the planning period, this is '14 through '20, that in the core business we'd spend about $8 billion and in care coordination, we'd spend about $5 billion, I believe, over the period -- excuse me, $3 billion in care coordination.

So, from an investment point of view, and this is both CapEx and acquisitions over the next 6, 7 years, we're planning about $11 billion. And we also indicated that we were not standing still, that we were looking at the opportunities that were available to us in the market.

So, I'm pleased that -- because there are a number of opportunities in the market, as you've seen -- so, I'm pleased that we've not wasted any time executing against our care coordination strategy, but I agree with Rice. We don't feel compelled to rush out and spend the money. It's just that there's just a lot of opportunity in the market right now to get this infrastructure in place and deliver the commitment that we made for the -- and the CMD for the planning period.

And I think Mike gave you a really good point. Let's keep in mind, we're not starting ourselves, from an acquisition standpoint in the core business, as well. As things are available and make sense, we'll continue to build that franchise, as well.

But you well know, Ian, there's certain parts of the US -- well, particularly in the US, where that's not as much opportunity, perhaps. But when you consider EMEA, Latin America, Asia-Pacific, I still there think there's a lot of greenfield opportunity out there within the core business, as well.

Sure. And then just a quick follow-up on that. In terms of your care coordination activity, at what point do you, personally, run out of capacity in terms of time to integrate these businesses and get what needs to be done out of those businesses, and maybe your tier-one reports, as well.

Well, I would look at this, I don't think the clock is ticking necessarily. I mean, we've given you a view of where we want to be in 2020, and I think we've gotten off to a good start, but I think, as long as we are able to find good deals, we're able to find opportunities within care coordination, we're going to continue to pursue that. I don't think the clock is ticking on us that we'll run out of time there, as long as we can explain it to you and justify it that it makes sense, if it comes in 2020 or 2021, we'll -- we're going to continue to do that.

So, I think we believe we're at a good pace. We like where we are and what we're doing. We, obviously, want to integrate what we have, and we want to make sure that it's functioning as we had envisioned it would, but this is going to be a very dynamic opportunity for us as we go out over the next couple of years. We're going to have to -- to use an old US term, we're going to have to show that we can walk and chew gum at the same time. But I think we've got the talent among our management to do that.

So, you don't feel that you're running out of time, on a personal day, between your 9 to 5, or presumably you work slightly longer than that, but your day-to-day business is not suffering as a result of these acquisitions, I guess?

No. I would say that's correct, and I think, Ian, at some point, perhaps we could talk about it at a future date, but I would tell you, when you look at our management ranks, we are very comfortable with the folks that have been with us a while in the core business, and we've gotten a look at very good teams that are coming with us in our care coordination.

So, I think it's really a matter of being able, for Mike and I, and members of the Management Board, to kind of look at this in a bifurcated way of the core business and what's happening in the new businesses. But we've been very deliberate in some of these acquisitions that we've made that we're trying to find the best management team we can, because I fundamentally believe you get the best people you can, and you let them go do what they know how to do, and the result will follow.

Yes, the only thing I would add to Rice's comment is just to remind folks that with regard to the largest investment we made, it was in Sound, which is taking a majority stake in the existing business. So, the entire management team remains in place. So, there's no stressing of the capacity issue from a management perspective at Fresenius Medical Care, because there's a very good team already in place that's been running that business for a number of years.

Yes, as is the same with NCP. So, we're very comfortable, Ian, that what's coming across is going to help and support what we need to do.

Great. Thanks very much.

And our next question comes from the line of Veronika Dubajova of Goldman Sachs. Please go ahead.

Good afternoon, gentlemen. Thank you for taking my questions.

My first one is just a follow-up on Michael's question about the Mircera pilot, and I'm going to try my luck and see if you might tell us how big the pilot's going to be, and sort of at what point in time do you expect to hit that full enrollment there? That would be really helpful.

My second question, which is also a product-related question, just wondering, when it comes to Zerenex, if you have any thoughts, if you'd looked at whether you might be using it in clinic, and what it might mean for your Epogen usage, going forward?

And lastly, my apologies if I missed this in your prepared remarks, but do you have an updated financial expenses guidance for this whole year, given the debt raising that you've done?

Thank you.

Hey, Veronika, it's Rice. Let me take one and two, and then Mike can give you some color on the financial expense.

I think I've probably said as much as I'll say with Mircera. We're starting the pilot. We certainly have assumptions about how this goes, and the outcomes that we see, what the progression of that would be, but it's probably not -- at this point, it would be theoretical, because we haven't even gotten in to the pilot in a significant way. So, let's do that another day when we've got some more data that we could talk intelligently about that.

On Zerenex, obviously, because this is something that's going to be sold to physicians directly by the Company, I can't speak for how doctors would feel about it, but let me just give you the following.

What we do know is at this point their label did not give them any ability to talk about ESA or IV iron sparing. In fact, they ended up with a warning for potential iron overload. So, I think we're still, as I said in second quarter, we're starting looking at this, wondering what's really going to come out.

They've yet to launch. I think that's probably going to happen here in a couple of weeks, but at the same time, I think there's some significant things that they're going to have to work through or they're going to have to sell their way through, in general, and it would be specific for us, because, obviously, given our history as a company, our physicians are going to be pretty used to dealing with us and understanding these kind of concerns. So, I think there's going to be some back and forth that's going to have to go on there.

And it's our understanding, when you take a global view of this, that Keryx has gone back to the European authorities and basically asked for additional time to address question that they've got around iron overload, and the lack of efficacy as it relates to ESA lowering.

So, I think it's a little early yet to see where that's going to go.

And, Mike, you want financial expense?

Sure. Sure, Veronika. Yes, I would say you won't see anything outside of the guidance I provided for this year. We have been, obviously, active in our acquisitions, and we've been active in the debt markets this year.

When we have gone out, we've gone out at some very reasonable cost levels. The convertible bond is a cash coupon of 1-1/8%. The deal we just closed a couple of weeks ago is 4 (inaudible) and 4-3/8, so, on average, 4-1/2.

And if you take a step back, and you look at some of the debt we paid off towards the end of last year and in the first half of this year, those were at higher carrying costs than the debt we've put on.

So, I think nothing extraordinary for this year. Nothing that will get in the way of delivering the guidance, and I think in terms of the maturity profile, and what we've tried to do from a planning perspective, if you look at the last several years, we've taken the opportunity to do three 10-year deals at very low, attractive rates, and the more recent deals we've done shorter than that 10-year have been in the 5-1/2 to 6 year range.

So, I think on the longer view, we're -- we've positioned ourselves pretty well in terms of trying to ensure that there's no dramatic changes in the cost profile with regard to the debt we're taking on for these deals.

That's terrific. Thank you, gentlemen.

Thank you, Veronika.

And our next question comes from the line of Ed Ridley-Day of Bank of America. Please go ahead.

Hi, good afternoon. Thanks.

Mike, you mentioned the improvement in your commercial book. If you could give us some color on the level of improvement, that would be -- in terms of pricing, that would be helpful?

And I also have a follow-up on the corporate cost debate. Maybe to put it a different way, obviously, you have increasing costs related to the GranuFlo and NaturaLyte litigation. With where we are now, do you feel that on a run-rate basis, so, in terms of where we are in terms of the last couple of quarters, that on a sort of quarterly basis that you -- that's the sort of level we should be thinking about, going forward? Or would you still expect that those corporate costs, those legal costs, to continue to go up sequentially?

Okay.

Go ahead, Mike.

Sure. Yes. On the commercial book, I wouldn't add anything beyond what I've said the last several quarters. I think we indicated that with the transparency we provided in 2012 and 2013 that we felt we had positioned the business well on a rates perspective, and I think beginning of this year we said that we thought on a net basis we'd see a modest positive. So, I think that's -- what we're seeing is consistent with that, and we've reported the last couple of quarters that we'd seen an improvement with regard to commercial treatments, which, in effect, means the next, also, I think a modest improvement there.

So, I think the trending is in the right direction, and I wouldn't elaborate on that -- those comments.

In terms of the corporate cost debate, the kinds of things we're talking about, the consulting, the legal, the GranuFlo, the FDA remediation, can be very difficult to predict. So, I would say earlier this year I indicated $30 million to $60 million incremental, and last quarter I indicated we're coming in on the high end of that.

So, there's a part of me that would like to believe that we're at a rate that should not change materially, but having said that, they're notoriously difficult to predict. Sitting here today, I can't think of anything specific that would tell me my current run rate is going to be different, let's say, in the next three months or six months.

But having said that, the $60 million incremental effect that I indicated, we're still working that through incrementality. So, you've seen an increase Q3 over Q3. You're likely to see an increase Q4 over Q3, but I think the run rate we're currently at, sequential quarter, is probably pretty stable.

And I would say, Ed, you highlighted GranuFlo. I think Mike's comments are spot on for that, as well. It's a little hard to predict, but we'd like to think we're where we need to be, but we're going to have to see.

Excellent, thank you, and just a very quick follow-up on NCP. Is it too early to talk to the synergies you can see? As you say, it is brick and mortar, potentially easier to derive synergies from that integration.

Yes, what I would say there is we do think there's going to be some opportunity as we look down the road at our vascular centers, and these NCP centers. They're generally in about 6 states. They've got about 21 facilities now. They're obviously going to be located, given the size of our vascular access footprint, we're looking at opportunity, can we combine some of those.

It's a little bit different set of equipment. It's a little bit bigger footprint on the cardiovascular side, but we believe there's opportunity to create some synergy in some of those locations. I mean, we obviously didn't go into this thinking it was a huge, huge synergy play, but we're going to take advantage of it as the opportunity presents itself, and we'll see that in a couple of locations. Others we may not, Ed.

Fair enough. Thank you very much.

Sure. Thank you.

Thank you, Ed.

And our next question comes from the line of Kevin Ellich of Piper Jaffray. Please go ahead.

Hey, thanks for taking my questions. Just a couple follow-ups, and I hopped on late, so, if I missed this, I apologize.

Rice, just wondering -- with the final ESRDC schedule from CMS that came out last week, was there anything that surprised you?

And then, on top of that, with your move into care coordination, just wondering if you guys will be able to participate in the chronic care management reimbursement, or if you've looked at that?

Yes, Kevin. So, let me just comment quickly on both.

I'd say for ESRD, not any real surprises. It really did kind of come out the way we thought it would. The comment I'd made earlier -- you may have missed that -- we simply we felt pretty good that it came out where we thought on really the two fronts that are important. By and large, the payment and the quality metrics came out as we had hoped they would, as they had been proposed back in July. So, we like to say kind of steady eddie in that regard.

And relative to care coordination in chronic care management, we haven't gotten into a lot of detail on that. I mean, if it's out there, and it's an opportunity, certainly we'll be exploring it, but it'd be a little premature for me to give you too much detail on it right now, other than we are looking at it, and I would see no reason it would preclude us, but we've got to do a little more work on there, or I need to catch up a little bit with, probably, some of the folks that are closer to it.

Did you guys see that coming in terms of -- I mean, there's, obviously, been a big focus by Medicare and the government on improving care coordination and I guess just fee for value versus fee for service. So, it seems like one of the ways the government incentivizes people is to add little extra payments. So, now they have a new code that they'll be reimbursing for, and with your move with Sound inpatient, I'm just wondering if that was kind of you guys reading the tea leaves?

Well, here's the good news is, I got really good people, and I can tell you, we had people that were aware and that looked at it. I didn't. I was late to that party, but, yes, I don't think that we were surprised by the opportunities presenting themselves.

The Sound management team, and then the folks in North America were looking at this. It's just I'm probably the last guy to come up to curve, Kevin.

Got you.

And then, I hate to ask another care coordination question, but, Mike, I think you made comments about other opportunities in the market. Just wondering what you guys are looking at, or what you -- what's the next piece of the puzzle that you guys would like to add, if there's anything?

Yes, I think I can't get into that with any degree of granularity, but I'd point you back to the -- there's a pretty good graphic on our website relative to what care coordination means, and how we're relating a number of elements of that therapy, and of what you would say the continuum of care, and where it can benefit our patients specifically, but, then, more generally, the healthcare needs of the larger population, and deliver improved care and cost savings to payers.

So, probably the best thing to do in the short time we have is refer you back to that, because that lays out, I think, pretty clearly, our areas of interest.

Yes, probably the --

Got you.

The other point I'd make, Kevin, is simply because so much of this activity has been in the US, but I'd encourage folks, as I did last quarter, to not think about this as simply US-centric. It may look a little different. It's going to have a little bit different spin to it, if you will, but there's some opportunities, internationally, as well. So, just keep in mind that we're not looking at care coordination in a real restrictive way to only be in the US only.

Makes sense. And then, last question for me, products business in North America was flat year over year, even though that is a sequential improvement from last quarter. Just wondering when should we start to see that improve?

Hopefully tomorrow, Kevin. No, kidding.

Good answer.

No, I think -- well, look, let's look at it this way. Let's break it down. When you look at the dialyzer business, and the other disposables that go on the hemo side, we're getting good growth. We're at 3.5% or so on dialyzers. The other consumables are at about 5%.

Keep in mind that the drag that's in those numbers, as well, is the fact that we did walk away from some very large tenders in Mexico on the PD business. We didn't like the price points that were accepted by the government. If I strip that out, we're seeing PD in the US up about, I think it's around 6%. So, we're seeing some growth there.

We've got to see a turnaround with machines, but as I said earlier, I believe that'll come. I think we'll see it in the fourth quarter. But that's something that we're working on.

But generally, we don't see -- there's nothing that tell us that somebody's taking share from us, Kevin. In fact, I think we're just still seeing people reluctant to spend some of their money on the capital equipment side.

Got you. And then, actually, you reminded me of one last question, Rice. With Baxter supply issues on PD in the US, I'm wondering if that helped out at all this quarter, of it it's going to help here in Q4?

Yes. What I would say is that -- two things. We are actually producing some product for Baxter. They came to us and they were looking for some help on CAPD, and we agreed to do that, because it was important that patients had a chance to get on the therapy. So, we'll see some improvement in that.

We're actually seeing some -- just improvement ourselves from people that are looking at, if Baxter can't supply, do they need to come to Fresenius. We haven't tallied up numbers. It's not huge yet, but I think the point I would really want to make is, we're actually working well together to try to make sure that we can keep the number of patient starts where they should be. We don't want to see anybody denied the opportunity if they really want to get on PD. So, we're trying to work collaboratively together, which may surprise some people. But we are. We're trying to do the right thing for the patient base here.

Great. Thanks so much.

You bet.

Thanks, Kevin.

And our next question comes from the line of Alex Kleban of Barclays. Please go ahead.

Yes, hi. Thanks for taking the question. Just two quick ones left.

On NCP, in terms of EBIT margin, how does that compare with what you'd indicated for Sound?

And then the second one is just a question on the cost per treatment. How big of a change did you see in Epo cost per treatment, year on year?

Okay, Alex. What I would tell on you NCP, I wouldn't think about the margin profile there similarly to Sound. Think of more -- because it's a vascular access business -- think of it more in the realm of what we see with the vascular business that we have, because, really, when you look at National Cardiovascular Partners, it is a vascular business.

So, I would say to you this acquisition wasn't something that was really outside the norm. We're simply building a bigger base, although a different type of vascular procedure, because it's cardio, obviously, versus what we typically have done on the nephrology side. So, think more comparable terms that way.

And then on your second question, Mike, I'll give that one to you on cost per treatment.

Yes, we typically don't get into all the puts and takes, but I would say I think the good news in the results we're reporting, and particularly the margin, if you will, the revenue minus the cost per treatment, is Amgen's price increases are very public, and the results we're showing is we're continuing to deliver the improvements we committed to despite their price increase earlier this year.

Yes, I think we're very comfortable with the dose that we're delivering to patients and the way that we're managing that through algorithms and protocols, Alex. I think we're holding our own. I'd leave it that way.

Okay, good. Thanks a lot.

And our next question comes from the line of David Adlington from JPMorgan. Please go ahead.

Hi, guys. Thanks for taking the questions. Three, please.

Firstly, obviously very strong numbers in A-Pac and LATAM. I just wondered if there was any tenders in there we should know about, and how we should be thinking about the sustainability of that sort of growth profile?

Secondly, just coming back to some of the other questions on the call around margins, obviously, they've been under a little bit of pressure this year. I just wondered at what point we might see those stabilize. Would it be as early as Q4, or into next year?

And then finally, when you're looking at assets on the care coordination side, who do you find you're typically bidding against? Is it other corporates or private equity? And when you win those assets, what is it -- why is it you win them? Is it just down to price, or are there some other aspects to yourselves that makes you the preferred bidder?

Thank you.

David, hi. So, let me -- I'll do one and three, and then we'll come back to two, and Mike can take number.

Relative to A-Pac, I would say that there's not anything unusual in the tender business. I mean, there's always tenders that come and go in that business, but we've not seen anything out of the ordinary that I would say, or something extraordinary. I think we are winning the tenders that we want to win, but we're not seeing anything huge come out of that, that would make me want to comment on something special there.

And on care coordination what I would say is, generally, who do we bid against? It's kind of all of the above. We've seen some private equity, and we've seen other companies involved. I would tell you that I think that we do our homework. People know who we are. We know who they are.

We know what we're trying to get accomplished, and it seems to work out. I don't know that there's much more that I could say to you there. You know I'm never going to tell you that we overpay.

So, I think it's really just the chance for us to give them a sense of our vision and where we're going, and I think I would probably leave it at that.

And I'd turn it over to Mike. Any prognostication on margins, Mike, or improvements?

Yes, I'd just come back to a couple things I commented on earlier. One I think in terms of the good news, when you take the mid-term view in US reimbursement is we think we have a period of relative stability in terms of Medicare reimbursement rates. The path is pretty well laid out in terms of what's going to happen, in the aggregate, on that rate.

So, I think that should be helpful to us, just in terms of stabilizing margins in that part of the world.

Also, I would just say, lots of questions on corporate costs, GranuFlo, incremental run rates. Those are having an effect, obviously, with the kind of incrementality that I mentioned, and that's something that even though I think, at some point, they'll go away, I think they're with us for a bit to come.

So, short-term view I would say -- I would just add that in response to your question. So, those are two of the contributors. When you look at everything else, I think that the margins are reasonably stable.

And then lastly, both in our Capital Markets Day, as well as on this call, that we do, over time, expect that the care coordination margins will be slightly lower than the core business. So, as that business develops, there'll be a little bit of a margin effect on that, but we've also been clear that we don't see that as a material margin effect.

Great, thank you.

Thank you, David.

And our next question comes from the line of Gunnar Romer of Deutsche Bank. Please go ahead.

Yes, good afternoon, gentlemen. Thanks for taking my question.

The first one would be with regard to acquisitions. I think you've now had something like 7% top-line contribution from acquisitions in the third quarter, and, if I'm not mistaken, roughly half of that coming from care coordination, and the remainder in your core business.

Can you help us a little bit more in terms of the earnings contribution you've seen, potentially, from acquisitions now in the third quarter or for the nine-month period, both in terms of EBIT, and I think, originally, you pointed to only very modest net income contribution? That would be helpful.

And then, second question, I don't know whether I missed that, but in terms of your guidance, I think at the Q2 stage you indicated that would be comfortable with coming out at the lower end of the net income guidance, pre-cost-savings. I was just looking for confirmation on that front.

And the cost savings figure, if you could repeat that? Was that $40 million pretax for the first nine months?

Thank you.

Sure.

Thanks, Gunnar. Go ahead, Mike. I know you covered those. Go ahead.

Yes. No, that's fine. The -- well, for the full year, you're correct. I guided to $500 million in incremental revenues with a de minimis after-tax effect in terms of the earnings associated with those deals this year, but they covered their financing costs. So, you've got a negligible effect on EBIT on a year-to-date basis in that regard. So, nothing different in the nine months than I was prognosticating for the full year.

The -- with regard to GEP, I did indicate on a year-to-date basis the net benefit was about $40 million, up $25 million from when we last reported, in June, net of the closure costs associated with the small manufacturing plant.

And the core earnings forecast is $1 billion to $1.05 billion , as I indicated on Q2. It's -- we anticipate that'll be on the low end of that range because of the incremental costs associated with the specific items I've mentioned.

The last point is that $40 million year-to-date is pretax on the GEP program.

That's very helpful. Thank you very much.

Thank you.

Okay, there are no further questions from the phone lines. Please continue with any other points you wish to raise, gentlemen.

Great. Thank you so much, everybody, for participating in our call today. Wish everybody the best and look forward to talking to you soon. Thanks so much.

All right. Thanks, folks. We appreciate it.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.